Good morning, ladies and gentlemen, thank you for standing by. Welcome to today's full year report. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded, Tuesday the 19th of February, 2019. I would now like to hand the conference over to your speaker today, Jesper Søgaard. Please go ahead, sir.
Thank you. Welcome to Better Collective's webcast presentation in connection with the Q4 report, covering the period January 1st till December 31st, 2018, which we released today. My name is Jesper Søgaard, CEO and co-founder of the company. With me today are CFO Flemming Pedersen and IR Manager Christina Bastius Thomsen. This is our first full year report since we listed Better Collective in June. It has been a very satisfactory year where we expanded our company significantly and where new market opportunities appeared. I strongly believe we have laid the foundation for continued profitable growth and to expand our position as the number one aggregator within online sports betting. Please turn to slide two, where we display our disclaimer regarding any forward-looking statements in the presentation. I ask you to please pay attention to this. Please turn to page three.
The agenda of the presentation is structured so that we will start with a short overview of how Better Collective is currently situated, followed by a presentation of the highlights of Q4. We will walk you through the financials, both for the quarter and full year, the acquisition we completed in the fourth quarter. We will review the recent market developments with a special focus on the U.S., where we have seen fundamental and positive progress in the recent months. Last but not least, we will share our thoughts on the future strategy and recap the framework of financial targets we decided upon in connection with the IPO. We will end the presentation with a Q&A session. Please turn to page four. Before we dive into the details of the quarterly performance, I just want to start with an overview of Better Collective as we stand today.
Better Collective was founded in 2002 by Christian Kirk Rasmussen and myself, has shown revenue growth and been profitable every year since we founded the company. Up until the beginning of 2017, our approach was organic development and growth. However, we changed our strategy and decided to take part in the ongoing industry consolidation as from 2017. Since then, we have completed 13 acquisitions of various size. Today, including our most recent acquisition, we have surpassed 250 employees working in seven offices throughout Europe and headquartered in Copenhagen, Denmark. Recently, we have also established presence in the U.S. in order to take part in the new market opportunities over there. Revenue has been growing steadily with a year-to-date CAGR of 53% over the last three years. In 2018, revenue amounted to approximately EUR 40 million.
Our target EBITA margin before special items is above 40%, the business model we apply allows for a high cash conversion, close to 100% before tax. The IPO that we completed in June was the first time we took in external financing to the company. We did so in order to continue the M&A strategy that we started in 2017 by using the company's own cash flow. Following the IPO, the ownership structure has changed. However, more than 60% of the shares are still held with founders and management. Both Christian and myself continue as part of the executive management team. Better Collective is today the leading affiliate company within online sports betting, and our strategy is focused on retaining and expanding that position. Please turn to page five. Now, moving on to the highlights of Q4. Overall, it was a quarter with very satisfactory performance. 30% revenue growth.
Operational earnings increased again with reported 44% EBITA margin, a strong cash flow with a cash conversion of 97%. As we highlighted in the presentation of the third quarter, revenue may fluctuate between quarters based on NDC growth and not least the outcomes of specific events and sports results. Looking back at an extraordinarily strong Q4 in 2017, where the average commission rate was approximately 40% higher than Q4 2018, we were satisfied with the performance. Flemming will revert with more insight into the financial performance in order to give a bit more insight into the moving parts of our business and share some in-depth insight into the underlying performance of the business. Looking at our expected future performance, I was very pleased to see the third quarter in a row where we see a company record of NDCs. In Q4, we sent 76,000 NDCs to our partners.
This is close to a doubling compared to the number of NDCs in the same period the year before. A very strong performance and a result of a dedicated effort following last year's slowdown on the back of temporary compliance measures from some of our partners. We continued executing our M&A strategy, resulting in an acquisition of Ribacka Group, one of the leading sports betting affiliates in Sweden. Looking further ahead, we see a very large pipeline of potential acquisition targets. I believe we can create a lot of value by continuing our M&A strategy, and I'm looking forward to integrate more successful companies into the Better Collective group. To conclude on the Q4 highlights, we were again fortunate to be recognized for our product innovation, as with this time received the SBC Innovation Award.
We are always very proud to be recognized by the industry, especially when it comes to our innovation and products. Flemming will revert with a more detailed review of the financials and M&A, we will discuss the U.S. market in more detail. Please turn to page six. Looking at 2018 at a whole, we are on track with regard to our financial targets. As we had growth of more than 50% and throughout the year we increased our operational earnings through leverage from acquisitions, organic growth, and strong cost control. What excited me most was our strong NDC growth and the underlying KPIs. I expect it will exceed our financial targets in 2019. An average of 2018 and 2019 will be at least double-digit organic growth.
On top of the strong business performance, we listed the company on Nasdaq Stockholm and thereby funded the continued execution of our M&A strategy. We have seen several attractive additions to the Better Collective family, making us market leaders in German-speaking markets, in Greece, as well as a strong position in Sweden. In total, we completed acquisitions with a value of up to EUR 85 million. From a market perspective, there are several new developments and of course, the opening of the U.S. market for sports betting was a highlight in that respect. Please turn to page seven and the word over to Flemming for more details on the financial performance and acquisitions.
Thanks, Jesper. Let's look at the financials for Q4 and also the full year 2018. In Q4, we acquired Ribacka Group, which first would be consolidated into the group P&L from January 1st, 2019. Looking at 2018, Q4 showed low performance due to several factors, including the outcome of major sports events, whereas Q2 showed strong performance with high growth and earnings, not least boosted by the FIFA World Cup in football. Q3 and Q4 showed satisfactory performance on revenue and earnings and an outstanding performance when it comes to delivering NDCs. Now let's review the numbers and please follow me to page eight. Looking at the revenue development, Better Collective has grown on average 53% in the last three years. From 2017 and onwards, it has been a mix of acquisitive and organic growth, and before 2017, the growth was solely organic.
Zooming in on Q4, total revenue was EUR 12.1 million which was 30% growth compared to the same period last year. The organic revenue growth was -9% compared to 72% in an exceptional strong Q4 in 2017. If you look at the revenue graph to the right, you can see the quarterly fluctuations and the extraordinary strong performance in Q4 2017. On that note, the commission rate on major accounts was approximately 40% lower in Q4 2018 than Q4 2017, mainly due to the outcome of sports events and to some extent also the strong growth in NDCs that are on revenue share contracts. The split between revenue share and CPA was 90 to 10 when we look at the revenue generated by players, whereas 8% of our revenue came from other revenue such as advertising, et cetera.
We saw record high NDCs with more than 76,000 in the quarter and more than 260,000 for the full year. This is more than double what we sent in 2017, where for a period of time we were affected by new compliance measures that temporarily dampened the conversion of NDCs. Revenue for the full year was EUR 40.5 million with an implied growth of 54%, of which 9% was organic growth. We expect that 2018 and 2019 combined will show double-digit organic growth. Please turn to page nine. Looking at the earnings, Q4 EBITA was EUR 5.4 million before special items, resulting in an EBITA margin of 44%. For the full year, EBITA before special items was EUR 16.1 million, a margin of 40%. The EBITA margin has increased during the year from 40% in Q2, 43% in Q3, now 44% in Q4.
We have seen the expected leverage from the organic growth as well as the effect from acquisitions. The cost base include added cost from acquired companies and also cost related to the launch of new U.S.-focused products. The effective tax rate for the full year is affected by special items as they are not taxed deductible. For Q4, the effective tax rate was 23%. Please turn to page 10. Moving on to the cash flow and balance sheet. Operating cash flow before special items was EUR 5.4 million, resulting in a cash conversion of 97% and EUR 15.2 million for the full year, resulting in a cash conversion rate of 89%. Investments related to acquisitions amounted to EUR 31 million in the quarter and EUR 85 million for the full year. Some of these are deferred payments, and yet some are earn-out payments based on future performance of the acquired companies.
Cash and unused credit facilities to the EUR 51 million end of the year. Equity ratio increased to 58% end of the year from 38% beginning of the year, mainly as a result of profits transferred to equity and also proceeds from the share offering that we completed during the IPO in June. The strengthened balance sheet, combined with the higher cash flow from operations, gives us significant room to further explore M&A opportunities. Please turn to page 11. As mentioned, the financial performance in Q4 2018 was affected negatively by outcome of sports result and to some extent, a high increase in NDCs that are sent on revenue share contracts. To give a bit more flavor on this, you can see the graph to the right shows the organic development in sports turnover and the commission rate.
As can be seen on the graph, the commission rate on major accounts was reduced by approximately 40% compared to Q4 2017. That was an outlying quarter. This is the random effect that we see in sports betting. However, the underlying performance in sports turnover showed strong growth, more than 30%. Also, the value of deposits by players increased significantly. All this, combined with a strong increase in NDCs, gives a strong support for the future revenue and earnings. Please turn to page 12. Looking at the acquisitions. Throughout the year, we have completed several acquisitions, and I will briefly outline our acquisition strategy, as well as provide an overview of the Swedish acquisition we did in Q4. Please turn to page 13. Since we started acquiring companies in 2017, we have completed 13 acquisitions of various size and strategic purpose.
Most of them share the characteristics that they hold strong market positions in regulated markets, and they mainly operate within sports betting. In 2018, we acquired companies for a value of up to EUR 85 million, expanding our presence in the German-speaking markets, Denmark, Finland, Greece, and Sweden. This local presence is important to us as it provides valuable local insight and understanding. The exchange of knowledge and best practice offers synergistic effects and keeps us at the forefront in the industry. In total, the acquisition strategy has provided significant profitable growth to the Better Collective Group, and we expect to continue this strategy. Now, let me comment on the most recent acquisition. Please turn to page 14. On December 21, we acquired Ribacka Group, one of the leading sports betting affiliates in Sweden. The acquisition included an organization in Stockholm, Sweden, that continues as Better Collective Sweden.
The two founders of the company will continue as daily management and will work closely with Better Collective headquartered in Copenhagen in order to coordinate the business activities and harvest the synergistic effects between the companies. The expected financial performance for 2018 for Ribacka Group include revenue of more than EUR 6 million and an EBITA of more than EUR 5 million. The company will be consolidated into the group P&L from January 1st, 2019. However, since the acquisition was done in 2018, it appears on our balance sheet end of year. The transaction value can amount up to EUR 30 million, where of EUR 15 million was paid upon closing, and EUR 6 million will be paid in May 2019, either as cash or in Better Collective shares. In addition to this, there is a potential performance-based payment of up to EUR 9 million.
The Swedish market became a regulated market as from January 1st, 2019. We believe this will result in a growing market. We therefore consider Sweden to be one of the most interesting markets for online sports betting in Europe. Please turn to page 15 and the word back to Jesper for our market review.
Thanks, Flemming. Generally, we are focused on being present in markets that have a clear and transparent regulation for online betting. This offers visibility and predictability. Most of our business is focused on being strongly positioned within sports betting in the various markets. This is where we have our core competencies and where we believe our product and technology allow us to have a competitive edge. Furthermore, we can see that from a regulatory point of view, sports betting is, in some countries, viewed favorably compared to other online gambling, such as casino. We always follow the market developments closely and welcome regulation that typically result in significantly larger markets. We prefer to have local offices and employees with insights into local sports and betting behavior, also allowing for a close contact with our partners. Please turn to page 16.
Better Collective is attracting users from most of the world. We establish contacts to new customers from almost all countries where online betting is allowed. However, most of our current business is in Europe, where we have strong positions in most of the important markets. We continue to build on this stronghold. The European markets for both sports betting and online casino continue to grow, in particular the online part where we see the strongest growth within gaming from mobile devices. Within sports betting, the majority of betting events take place during the game as live odds betting. All our products are therefore being developed with the approach of fitting the mobile devices as a priority. Please turn to page 17.
In general, we can see that many European countries are adapting regulation that allows online betting as it limits black economies, provide national tax revenue, and not least provide the best possible environment for sound betting behavior. In the full-year report, we have provided a short review of what we see as the most relevant market developments. In summary, Sweden became a regulated market as from January 1st, 2019, which we see as very positive. U.K. will implement an increase of the taxation on online casino as from October 2019 from 15% to 21%, but not for sports betting. In Germany, there is a continued unclear situation for online casino with different frameworks between states, whereas the framework for sports betting is transparent and believed to be even more clearly regulated in the future.
In Q4, Slovakia implemented new law that opens up for online casino and sports betting in 2019 and 2020 respectively. In Italy, the new government has introduced a ban on gambling advertising. It is still uncertain what this will entail in practice. Our view is that the most European countries are moving towards regulated markets with different speed and with some introducing adjustments to balance the different aspects. Based on these macro trends, we expect to see continued strong growth coming from the European markets. Please turn to page 18. The regulatory development in the U.S. is obviously something we follow very closely. With the repeal of the PASPA Act last year, it is now up to each state to decide whether to allow online sports betting. New Jersey, as a first state, is open for business and has shown very strong growth since the start.
Pennsylvania has also decided on the regulatory framework, but the market has not yet opened for online sports betting. It is expected that Delaware, Mississippi, Nevada, and West Virginia will follow thereafter, making up an estimated market potential of more than EUR 1 billion. Soon after, some of the larger states such as New York, Michigan, and Massachusetts are expected to follow. New York alone is believed to potentially be a larger betting market than the entire U.K. In Q4, an opinion on the so-called Wire Act was raised. This will have no effect on sports betting, as sports betting was already included in the previous interpretation. While it may affect interstate lotteries and poker, we expect no impact on our business. Let me add that we already implemented geo-blocking measures on our products to ensure that customers would be directed only to operators licensed in their state.
The U.S. market is characterized by high player values, and we expect that the market long term will exceed the European sports betting market. However, we also expect that it needs a different and dedicated approach in order to unlock this big potential. We view each state as an individual country with different regulation, different operators, and often with different views on individual sports. Some products can work for the entire U.S. market, where some needs to be tailored to the single state. We have launched a number of products that are driving revenue as we speak. We launch more U.S.-focused products, and we are shaping the content on U.S. sports for our global brands such as bettingexpert.com. Throughout these efforts, our technology platform allows us big flexibility. We're teaming up with relevant online operators and seeking necessary licenses.
We have established a U.S. subsidiary, Better Collective, Inc, and we started building an organization that will have U.S. as its focus. In addition to the organic strategy, we're in discussions with potential partners that may provide for U.S.-focused acquisitions and/or collaborations. Moving to South America, upcoming regulation in Brazil and in the province of Buenos Aires in Argentina make for new growth opportunities for Better Collective. This sums up the market review. Please turn to page 19 for a strategic review. During the last year, Better Collective has changed from a successful but yet quite small private Danish-based company with around 100 employees to a public company with more than 250 employees spread over seven European offices. Revenue and earnings have increased significantly, and we have a totally different financial foundation for future growth.
We strongly believe that iGaming and the affiliate marketing within this vertical will continue to grow, both in mature markets, but also as we have seen in the U.S., through changes in regulation. So far, this has mostly been a European venture, I'm sure this will change in the future. In my expectation, we'll see fewer affiliate brands that will grow alongside the operators. Please turn to page 20. The business platform we stand on today is a business that approximately has tripled in two years, both in revenues and earnings. If we include the businesses that we have acquired during 2018 and assume that they were consolidated with full-year effect, Better Collective now has annual revenues of more than EUR 50 million and operational earnings of approximately EUR 25 million based on pro forma numbers. This is the basis from which we have started January 1, 2019.
We strongly believe that size matters as it allows us to continue investing in product innovation and in market expansion. For us, this is key to a long-term sustainable growing business. Please turn to page 21. Our strategy for the coming years will stay focused on three main themes, organic growth and development by simply having the best product offering for our users. This has always been our key focus. By having that, we'll attract high volumes of valuable traffic and thereby be the preferred partner for operators. We've seen success in our first years of taking part in the industry consolidation, and we see so much value in continuing this path. We strongly believe that size matters and therefore M&A will continue to be a cornerstone in our strategy. Last but not least, the regulatory changes in the U.S. have created a major growth opportunity.
We are already present and have launched multiple work streams to expand with the market. Please turn to page 22. Expressed in numbers, we have set some financial targets that define how we want to grow and be profitable, and how we want to finance our company. These targets remain unchanged from the IPO and will be our current financial framework. The financial targets are not to be seen as quarterly targets, but as average targets for the period 2018-2020. As we presented today, Q4 2017 was a record quarter with extremely strong sportsbook results and 72% organic growth for Better Collective. Going into Q1 2019, it's worth noting that Q1 2018 was exactly the opposite. Only 1% organic growth. When comparing the quarters, this needs to be considered. Please turn to page 23.
To sum up, Better Collective is the number one sports betting affiliate worldwide, a position we worked hard to keep. We operate in high growth markets with the U.S. presenting massive growth opportunities in the years to come. Our attractive business model and proven M&A strategy means that we can expect continued profitable growth. This concludes our presentation, and we will now turn over to the Q&A session. Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. We have one question, sir. The question comes from the line of Christian Heermann. Please go ahead. Your line is open.
Hi. Thanks. Just a couple of questions. The first one is on Sweden. You mentioned in the report, in the regulatory update, I believe it was. Let me just find it here. A change in market dynamics is evident from the first couple of weeks since the regulation. Could you just elaborate a bit on that? If you mean that in a positive way or in a negative way, or what do you mean by that?
Hi, Christian. Jesper here. Well, we mean it in a positive way. What we have experienced is that clearly, many Swedish people are now looking for new regulated operators, which of course benefits us as we can drive them to these sportsbooks. At the same time, we are of course also experiencing the effect of the 18% gross gaming tax. But overall, these dynamics we see as a positive thing.
All right. Yeah, that's loud and clear. Thank you for that. Just on South America, which you also mentioned a bit about. There's things going on in Brazil and Argentina. It might be not happening over the next couple of months, but in a couple of years perhaps. What's your presence in terms of Spanish-facing assets? Do you have that type of assets in your portfolio, and what's your foothold in those countries traffic-wise?
Well, it's actually quite good. What probably quite a lot didn't notice when we announced the Bola acquisition last summer, because it was mostly focusing on the German-speaking markets. The fact is that they actually had a very strong Spanish asset, which we are now operating and has developed well. We actually have a very strong asset targeting the Spanish-speaking markets.
Okay. A question on the organic growth for the full year, which came to 9%, which is slightly below your target of double-digit organic growth. Could you just elaborate a bit more? You spoke about it in the report, just please, given the fact that we had the World Cup during 2018, it seems like that type of event should If it's any year that you should be able to meet your targets and grow by double digits, it should be during a year with a World Cup. Why didn't that materialize?
Yeah. Flemming here. I can perhaps elaborate a bit on that. You can say the main reason for this is, of course, the specific outcomes of sports results. During the World Cup, for instance, we sent, and throughout 2018 for that matter, we sent a wealth of new NDCs, as we also explained in the report. Most of these are sent on the revenue share contracts, actually that is a drag to our revenue for some time until, because they receive sign-up bonuses and for some period, they will basically be either underwater or at least a drag in the revenue growth.
When we look at the commission rates in 2017, where we did, you could say, had a dampening effect on NDCs. We had, you can say, an opposite effect on the commission rates that basically were in favor of the sports books, in particular in Q3 and Q4 in 2017. I think this is, you can say, the fluctuations we will see being, A, focused mostly on sports betting, and B, mostly, I would say, applying a business model that is on rev share contracts. If you go back to the Q1, as mentioned, last year, we saw only 1% organic growth after a 72% organic growth in Q4 2017. We expect, you can say, as long as we are happy with the NDCs, sports turnover, and value of deposits, that is really what counts.
Yeah. Jesper, I can just add to that. Basically, the performance we have seen in NDCs in 2018 actually exceeded our expectations. That is, of course, the basis of our optimism for 2019, where we expect a stronger organic growth than we have seen in 2018.
Okay, great. Thanks. Just a final question. You mentioned that you have EUR 51 million in cash and unused credits available. Could you just remind me, that obviously doesn't include the earn-out for the Ribacka acquisition, and perhaps other earn-outs as well. If we take those into account, what is your amount of unused cash and credits then?
It does not include the earn-outs that we have on the balance sheet, clearly. The EUR 51 million is simply what we have as cash and current credit facilities. You can say, with the increased operational earnings, we might also, you can say, at some point decide to increase the credit facilities. I think we still have, you can say, significant room to maneuver, but to answer your question, it does not include the earn-outs and deferred payments, and also some of these can be paid in Better Collective shares should we decide so.
That's true.
Yeah. I think, as mentioned, we believe that we have significant room to maneuver. Also by increasing our current credit facilities, which is basically leverage to the operational earnings.
Fine. Just a final question on M&A. You're looking in the U.S., you are looking in Europe. Are there any other regions where you're also looking for potential acquisition targets, or are those the two main hotspots?
Those two areas have our main focus. That being said, we also see incoming from outside of Europe and the States in our pipeline. Europe and U.S. will be our focus. Again, we would also be opportunistic. If we see a really good opportunity elsewhere, well, we may go for that, but Europe and U.S. is our focus right now.
Price-wise, multiples are sort of expectations right now are sort of what we've seen in the past or the last couple of years, or have there been any material changes that we should be aware of?
No, we don't experience that. For the U.S., it will be a bit higher multiples that we would see than in Europe. I think that's of course, because of the big potential in the States.
Yeah, that sounds reasonable. Just comparing Europe today compared to six months ago or 12 months ago, sort of the change in price.
No changes. We see an attractive market to acquire in.
Yeah, great. Thank you. That was it for me. Thank you very much.
Thanks.
Thank you. There are currently no further questions on the phone lines. Please continue.
Thank you. We have received a couple of questions on the webcast. I'll read out the first one from Marius Chadelson. "Hi, guys. Can you elaborate a bit further on the possible scenarios for the Italian market given the ad ban?
Yes, Jesper here. To be honest, I don't think anyone can really predict exactly what's going to happen. What we do expect is that if they are to really harden enforce this ad ban, we reckon that affiliate marketing online will be the last areas where they would enforce it. Ultimately, if they really decide to do so, of course, we would also be affected by that. I think that's really what we can say. There's definitely some uncertainty associated with the Italian market at the moment.
To the second question, I can read that up. Reference slide 20, pro forma numbers, revenues, and adjusted EBITA implies a 48% margin. What kind of investments will you do in 2019 that will reduce the margin down towards the 40% target? Just to answer that, the financial target is an above target. What we have flagged with our financial target is that we expect to, you could say, stay on average above the 40% EBITA margin. It's correct that if we include the businesses that we have acquired and assume they were fully consolidated, it will result in approximately 48% margin as we stand. We have also been explicit that we will do some investments, if necessary, in particular into the U.S. market, for new products, and also potentially invest in further marketing should that be decided.
It's not a magic number that we will stay on those 48% that we now start off with in 2019. Basically what we flag here is we will stay above the 40%. This is how we view this. I hope that answered the question.
Thank you. There are no more questions on the webcast, this concludes the Q&A session. Thank you for listening in.
That does conclude our conference for today. Thank you for participating. You may all disconnect.